What Apple's $9.4 bn capital expenditure in 2012 tells us about the company's future

Apple's capital expenditure in 2012. Where is that money going, and what does it tell us about the company in the future?

Apple's stock price may have taken a few hard knocks, having fallen 25% in the past three months. But here's another figure - $9.4 billion. That's Apple's capital expenditure in 2012. Where is that money going, and what does it tell us about the company in the future?

It eventually had to happen and it did - Apple stock has fallen sharply in recent weeks and has now fallen by over 25% from three months ago. The latest sharp falls followed the downgrade of Apple stock by analysts of Citigroup. "Near-term supply chain order cuts, while inconclusive in nature, bring into question the strength of iPhone 5 and refocus investors onto risks in the Apple story," said the Citi report which triggered the latest slide.

Here's another number though, also connected with that supply chain, which could prove far more informative of what's likely to happen with Apple going forward, than short-term movements in device orders, or sharp drops in the share price. That number is $9.4 billion - Apple's capital expenditures for its 2012 financial year (which ended in September). Add in spending on Apple Stores, and that number crosses $10 billion. To put that in perspective, expenditure on infrastructure by this country as a whole in 2011-12 was around $18 billion.

More interestingly, Apple's capex has grown by leaps and bounds in recent years, parallelling its sales of iOS devices. And it expects to spend a similar amount on capex in 2013. The only comparable capex spender is Intel - competitors such as Microsoft, Google or Amazon all have capex spends in the region of $2-4 billion. How does Apple spend all that money?

THE BIG SPEND

As Horace Dediu, industry analyst and founder of Asymco, a tech research firm, has argued, these giant leaps in Apple's capex tell a deeper story - about Apple, and also about the mobile tech industry.

First, where is the money going? Spending on its retail stores accounted for only $865 million. In comparison, $9.5 billion, says Apple in its annual report, was spent on "other capital expenditure, including product tooling and manufacturing process equipment, and other corporate facilities and infrastructure".

Put in plain language, this amount, as Dediu argued at a conference in Taiwan in October (before Apple's annual report was out), goes towards two main categories of spending. One is data centres loaded with servers to handle the enormous volume of data that Apple serves up to its iPhone and iPad customers through iCloud, iTunes and, more recently, Apple Maps. These are all hugely data-intensive services, requiring the ability to service millions of data requests each minute from across the globe, and a data centre on this scale spread across a couple of hundred acres, can cost upward of a billion dollars. The bulk of Google's capex is on such centres. So is Facebook's.

The second category - "product tooling and manufacturing process equipment" - is, in layman's terms, the kind of equipment used to build the hardware components in smartphones - chips, batteries, displays and the communication equipment built into the phone. While Apple believes in controlling both the hardware and the software in its devices, it has rarely been a hardware manufacturer itself, preferring instead to outsource such manufacturing and assembly of components to suppliers based mostly in East Asia such as Foxconn.

The fact that Apple has ramped up expenditure on such equipment on its own, says Dediu, reflects the need for handling the enormous volumes of devices that Apple now sells, and the kind of large-scale plants needed for those volumes. Investing in such plants may be beyond the capacity and balance sheets of most contract manufacturers.

A company like Apple, with over $120 billion in cash on its balance sheet, has no such problem. By investing directly in its suppliers' plant and equipment, Apple is able create enough capacity to bring its latest products to dozens of markets within a very short time - a huge ramp up in production that would leave any competitor gasping.

WHERE APPLE GOES...

Except perhaps, Samsung. The Korean electronics giant is another reason why Apple could be moving, partially at least, into manufacturing. Apple competes with the Korean company in smartphones, but is also dependent on it as a key supplier of components, a competitive risk. Investing in its own manufacturing to some extent will help reduce that dependence on a competitor.

The two categories of investments by Apple, one far up the supply chain, away from consumers and oriented towards the hardware side, and the other, much more closer to the customer end, and oriented towards software and applications, exemplify an important trend, says Dediu, which, in a sense, brings the computer industry full circle to an earlier era.

Decades ago, companies such as IBM invested in the entire value chain - from the nuts and bolts and chips of hardware, to the software applications that users ran. After IBM, and some others, few companies invested in the entire chain. Microsoft, for instance, eschewed hardware altogether. Dell focused entirely on the retail supply and distribution end.

But recently Microsoft, with its Surface tablet and Xbox, entered hardware. Google's acquisition of Motorola Mobility, which manufactures phones, is another example of a tech company moving beyond its "core competence". Samsung, traditionally a hardware maker, invests heavily in retail stores and outspends Apple on advertising. There have been rumours that Facebook wants to build and sell a phone. Amazon, a retailer, develops and sells its own Kindle range of hardware devices. The capex boom in tech may no longer be restricted to Apple.